Leidos Holdings' Earnings Call Contradictions: VBA RFP Timelines, Defense Tech Pipeline Clarity, Health Segment Guidance Shifts

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Date of Call: Aug 4, 2026

Financials Results

• Revenue: $4.56 billion, up 7% year-over-year, 4% organically
• EPS: $3.26 per diluted share (adjusted EBITDA margin of 13.8%)
• Operating Margin: 13.8% (adjusted EBITDA margin)

Guidance:

• Raised lower end of revenue range by $100M.
• Raised lower end of EPS range by $0.05.
• Operating cash flow guidance raised by $200M.
• Free cash flow guidance raised by $50M.
• Expect CapEx closer to 2026 levels.
• Adjusted EBITDA margin guidance maintained at mid-13%.
• Expecting 7% organic revenue growth and ~19% adjusted OI growth for the rest of Leidos in 2026 (excluding VBA-MDE changes).
• Defense growth to accelerate to high single-digits, double-digits excluding ISR transition.
• Health segment revenues expected to sustain around current levels for the year.

Business Commentary:

Revenue Growth and Bookings Momentum:

• Leidos reported record second quarter revenue of $4.6 billion, up 7% year-over-year and 4% organically.
• The growth was driven by strong bookings momentum, with a book to bill ratio of 1.1, indicating robust customer procurement activity.

Defense Segment Performance:

• The defense segment posted a 2.2 book to bill ratio in Q2, reflecting strong customer traction and award velocity.
• This was attributed to several major defense tech programs, including a $1 billion framework agreement with the Department of War, positioning Leidos for future production awards.

Health Segment Challenges and Outlook:

• Health segment revenues contracted due to the full incorporation of the fourth vendor on the VBA medical disability examination program.
• The VA's review of incentive payments and contract suspensions were factors, but Leidos remains positioned for future growth with a focus on quality and efficiency improvements.

Enhanced Financial Guidance:

• Leidos raised its 2026 revenue guidance by $100 million, EPS guidance by 5 cents, and operating cash flow guidance by $50 million.
• This adjustment reflects the company's confidence in its North Star 2030 growth strategy, particularly in defense tech, energy, and cyber growth pillars.

Free Cash Flow and Capital Deployment:

• The company generated $761 million in free cash flow for the quarter and plans to resume share repurchases with a new board authorization.
• The strong cash flow performance and capital deployment strategy are supported by the company's low capital intensity business model and ongoing cost management efforts.

Sentiment Analysis:

Overall Tone: Positive

• CEO reported 'another strong quarter' with record revenue and adjusted EBITDA margin. He stated 'our North Star 2030 strategy is working' and that they can 'raise our full year guidance' due to 'meaningful growth emerging across our portfolio.' He described the defense tech outlook as 'bullish' and 'very pleased' with growth momentum and pipeline.

Q&A:

• Question from Scott Mekas (Melius Research): Concerns about DHA's Dim Sum plan to do integration internally and the role of systems integrators going forward.
  Response: Management sees a trend towards insourcing and commercial acquisition across agencies but believes Leidos can transition its value-added services. They expect ongoing support for system maintenance and enhancement, with the customer likely needing a partner despite wanting more organic capability.

• Question from Matt Akers (BNP Paribas): Clarity on VBA recompete, incentive payments, and margin outlook for 2027.
  Response: The VA has suspended incentive payments for this year due to administrative issues, but the business changes are fully reflected in raised 2026 guidance. Management expects incentives to return in the future RFP and feels confident competing based on strengths like quality and cost.

• Question from Colin Canfield (Cantor): Key levers to improve health margin and growth, and free cash flow trends.
  Response: Management is pleased with Q2 free cash flow, sees no need for increased CapEx spending, and expects continued strong performance with efforts to reduce days sales outstanding. They view the business as low capital intensity with high cash return, and share repurchases will continue.

• Question from Seth Seisman (JP Morgan): Cadence of bookings in Intelligence and Digital through FYE and opportunity to increase backlog.
  Response: Customer activity is picking up, evidenced by a book-to-bill ratio >2 in defense, and they expect continued activity. They see a good chance to capitalize on a chunk of $23B in proposals over the next 3-12 months, aligning with administration priorities.

• Question from Toby Somer (Truist): Perspective on defense business opportunities and margin outlook.
  Response: Management is very bullish on defense tech, expanding growth engines to include munitions and counter-UAS. They highlight strong programs like IFPIC, Havoc Spear, and LCCM with a large addressable market, expecting double-digit revenue growth and accelerating margins by 2030.

• Question from Sheila Kylaglu (Jefferies): Baseline for health profitability in 2026/2027 following VBA changes.
  Response: Q4 2026 is expected to be a good jumping-off point for 2027. While the VA's focus on quality and veteran experience presents challenges, Leidos sees opportunities to grow managed health and rural health pillars beyond the MDE business, supported by new talent and capabilities.

• Question from Ken Herbert (RBC): Segments driving organic growth guidance and impact of CR/timing on top-line guide.
  Response: Health is expected to sustain Q2 levels, while homeland and defense should see accelerated growth. The ranges provided allow for modest contributions from new programs; the guidance is resilient to potential CRs as it's driven by international and energy work predominantly.

• Question from Gavin Parsons (UBS): Timing of VBA RFP and margin outlook for the business.
  Response: A draft RFP is expected in the coming weeks, with a formal RFP likely 30-60 days later. They anticipate bids by year-end, with a decision expected early next year. Margins are currently good due to investments in technology and quality, and they plan to continue differentiating to win.

• Question from John Godden (Citi): Balancing growth investments, M&A, and share repurchases given the healthy balance sheet.
  Response: Priority is investing in the business to support national security. Share repurchases are authorized and will continue. M&A is not currently a focus due to high valuations; capital will be deployed intelligently, with organic growth and dividends prioritized.

• Question from Marianne Perez Mora (Bank of America): Nature of the $12 billion defense pipeline opportunities.
  Response: The pipeline includes new and follow-on contracts for programs like Navy's Medium Unmanned Surface Vessel, counter-UAS, and cruise missile production. It reflects a robust trajectory with strong customer interest in Leidos' capabilities in sensing, autonomy, and manufacturing.

Contradiction Point 1

VBA RFP and Contract Extension Timeline

Inconsistent timeline for when a formal RFP will be issued and the current contract's extension period.

What are your expectations for Q3 revenue? - Gavin Parsons (UBS)

2026Q2: A draft RFP is expected 'any day.' Assuming a 30-60 day process, a formal RFP could lead to a bid submission by early 2027. - [Tom Bell](CEO)

What is the expected timing for the VBA draft RFP and the margin outlook for this business? - Matt Akers (BNP Paribas)

2026Q2: While there is no draft RFP yet, incentives are expected to be part of the next contract. The VA likely will extend the current contract through part of next year... - [Tom Bell](CEO)

Contradiction Point 2

Defense Tech Pipeline Opportunity Nature

Contradiction on whether the pipeline primarily consists of new contracts or follow-ons to existing programs.

Marianne Perez Mora (Bank of America) - Marianne Perez Mora (Bank of America)

2026Q2: The $12 billion pipeline over the next 12 months includes follow-on contracts for existing programs (e.g., Common Hypersonic Glide Bodies, Small Cruise Missile) and new opportunities like the Navy's Medium Unmanned Surface Vessel... - [Tom Bell](CEO)

What is the nature, status (new/recompete), and duration of the $12 billion pipeline of fixed-price and higher-margin opportunities in Defense? - Mariana Perez Mora (Bank of America)

2026Q2: The pipeline includes a mix of new contracts and follow-ons to existing programs. - [Tom Bell](CEO)

Contradiction Point 3

Health Segment Outlook and Growth Trajectory

Guidance on the health business's 2026 performance shifts from a modest reset to a more negative baseline.

Ken Herbert (RBC) - Ken Herbert (RBC)

2026Q2: The raised guidance reflects momentum in most segments... Health: Run rate expected to stay at Q2 levels; changes are fully embedded. - [Chris](CFO)

Can you discuss the organic growth guidance for H2, the areas of risk or uncertainty, and what is embedded in the top-line guidance regarding CR timing? - Tobey Sommer (Truist Securities)

2026Q1: The business is expected to have a modest reset in 2026 but with a growth trajectory. - [Chris Cage](CFO)

Contradiction Point 4

Capital Expenditure (CapEx) Strategy

Characterization of elevated CapEx moves from being a finite investment to a point-in-time increase.

John Godden (Citi) - John Godden (Citi)

2026Q2: Increased CapEx in defense tech is a point-in-time investment, not a sustained level. - [Tom Bell](CEO) and [Chris](CFO)

How are you balancing growth investments, M&A, and share repurchases, particularly with regard to pursuing bold M&A opportunities given current low valuations? - Peter Arment (Baird)

2026Q1: The elevated CapEx is for a finite period related to critical production program investments. It is not intended to be perpetual. - [Tom Bell](CEO)

Contradiction Point 5

VA Medical Disability Exam (MDE) RFP Timing and Details

Inconsistent guidance on when the RFP will be issued and what it will cover.

Will Matt Akers participate in the BNP Paribas earnings call? - Matt Akers (BNP Paribas)

2026Q2: The VA is focused on a re-compete process... A draft RFP is expected soon; Leidos is confident it will play to its strengths. - [Tom Bell](CFO)

Regarding the VBA medical disability exam (MDE) business, can you elaborate on the incentive payment changes, 2027 margin expectations, and potential business loss or future opportunities? - Gautam Khanna (TD Cowen)

2025Q4: The VA expects an RFP for the next phase of the medical disability exams program in the middle of the year (summer). Details are not yet available. - [Tom Bell](CFO)

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